AltaGas Preferred Shares: Strong Yield, Good Credit Quality (ALA.PRB:CA)

AltaGas (OTCPK:ATGFF) (TSX:ALA:CA) is a Canadian midstream and energy firm that expanded its presence within the US with its 2018 buy of WGL Holdings, which was primarily a fuel utility within the Washington, D.C. space. The corporate has been a long-time issuer of Canadian most well-liked shares, however in the previous couple of years they redeemed a variety of the upper yield points and changed them with subordinated word financing. That debt is non-publicly traded, and does not qualify for the dividend tax credit score for Canadian buyers. This piece will likely be an replace from my earlier piece masking AltaGas most well-liked shares. My very own place throughout the complicated has modified, and rates of interest have moved up dramatically since then, so an replace appeared warranted.

AltaGas Enterprise

The agency has two major traces of enterprise – they personal pure fuel midstream belongings primarily in Alberta, Canada and surrounding areas (therefore the portmanteau title “AltaGas”) and utility belongings in the USA. Previous to the pandemic they’d made a big buy of the pure fuel utility within the Washington, D.C. space, and the enterprise is now ~60% US utility belongings and 40% Canadian midstream belongings. They beforehand owned an Alaska pure fuel utility, which they recently sold at a superb a number of with the proceeds used for deleveraging, which strengthens their credit score metrics going ahead.

Most popular Shares

This piece will deal with the funding deserves of their most well-liked shares. There are a variety of points, that are summarized within the desk under, all with a $25 face worth. They’re all reset most well-liked shares, which signifies that the funds will range based mostly on an underlying rate of interest. The AltaGas points reset based mostly on Canadian Authorities charges, both the 5 12 months charge or the 30 day Canadian T-Invoice charge. The entire points have a $25 face worth, and all are redeemable on the possibility of the corporate each 5 years. All figures within the under desk and all through the article are in CAD.

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Supply: Writer’s Database, AltaGas Filings

In my earlier piece, I had disclosed a place in ALA.PR.A (ALA.PRA:CA), with the logic being that it had the best yield after reset of the problems, and that as a result of it had the bottom unfold (and the bottom value) it had essentially the most upside leverage from will increase in rates of interest. Since charges have been very low on the time I considered will increase as extra seemingly than decreases, and that’s very a lot what occurred. I used to be appropriate that it will outperform the problems with minimal resets, as a result of as rates of interest rose the high-spread points have been known as at $25 for smaller features than what the As earned, and the As did outperform the upper unfold Gs.

They didn’t nonetheless, outperform the floating charge points or the E’s, and I feel the reason being the identical for each. The Es are anticipating the reset to present 5 12 months charges on the finish of the 12 months, whereas the As do not reset till the top of 2025. With the yield curve inverted, the market appears to be suggesting that charges will drop by then. That very same yield curve inversion can also be superb for the floating charge B’s and H’s, which have appreciated extra shortly as they instantly get the good thing about greater charges.

Given the inversion and the upper present and future yields accessible on the floating charge points, I’ve swapped my place from the five-year-reset A’s to the floating charge B’s. That half is mainly an rate of interest name – since all of the securities have the identical issuer and seniority, the variations in return come all the way down to their completely different phrases. And floating charges are greater than 5 12 months charges proper now, and based mostly on Financial institution of Canada dialogue I feel they’ll proceed to lift them for no less than a short time.

Which Floating Price Most popular to Choose

Each ALA.PR.B (TSX:ALA.PRB:CA) and ALA.PR.H (ALA.PRH:CA) alter their fee each quarter with the adjustments in short-term charges. The one distinction between the 2 is the unfold, with Hs paying 3.06% above the benchmark charge and the B’s paying a much less unfold of two.66%. Naturally the Bs commerce at a cheaper price, which greater than compensates for the decrease funds at present rates of interest. In truth, the Bs are a lot cheaper that at any constructive underlying Canadian 30-day charge the Bs may have a greater yield on price than the Hs at their present relative pricing. The one time the Hs would come out forward could be if rates of interest went unfavorable, which does not seem to be a giant threat to me at current.

Whereas most on-line assets present the trailing yield for these most well-liked shares (which is incorrect going ahead as a result of charges have risen) you may affirm their present dividend funds and get a hyperlink to the prospectus displaying the system straight on the AltaGas preferred share page.

AltaGas Credit score Dialogue

In fact, it does not matter which sequence of AltaGas most well-liked share we decide if the underlying issuer stops making the dividend funds, so a dialogue of the credit score high quality of the underlying enterprise is important. DBRS, which is usually the usual company for Canadian most well-liked shares, has them rated as PFD-3H, the place the H stands for top. Broadly talking, the rankings for Canadian prefs largely range from PFD-2H on the prime finish for big secure monetary companies to PFD-3L on the backside finish for extremely levered entities. The guardian firm holds an funding grade credit standing from S&P and Fitch on the debt aspect as effectively. Nonetheless, I want to judge the creditworthiness myself each qualitatively and quantitatively.

On the quantitative aspect, they’d $7.97 billion of debt excellent as of their final financial statements, in addition to $600 MM of excellent most well-liked shares. That compares to the agency reporting normalized EBITDA of $1.537 billion, so they’re levered 5.6X by the popular shares. They’ve been endeavor initiatives to de-lever, together with the aforementioned sale of the Alaskan utility, and their said technique is to de-lever to 5X debt-to-EBITDA within the medium time period and 4.5X debt-to-EBITDA in the long run. In the event that they full these objectives it will be helpful for the credit score high quality of the popular, however even at 5.6X I feel their leverage is suitable given the qualitative components.

Particularly, their enterprise could be very sturdy and secure. The US utilities are roughly 60% of the enterprise and they’re regulated charge utilities with cheap regulated returns on funding. The midstream phase participates within the pure fuel worth chain all through Western Canada, and has important take-or-pay contracts on a big portion of its belongings, and the place it does not they’re usually advantaged. For instance, their export capability for propane and butane are the closest giant scale terminals to Asia for these merchandise. I feel this enterprise deserves to exist and it’ll proceed to earn cheap returns on its capital which will likely be adequate to proceed to make its funds.

The opposite qualitative issue I feel is related is their continued entry to low price financing. Final month they bought senior unsecured notes with a 3 12 months time period and a 4.638% coupon. The Authorities of Canada benchmark 3 yield charge on Could eleventh (when that deal closed) was 3.5%, in order that they paid solely barely over a 1% premium to the sovereign for that cash. That means to me that the market has a restricted quantity of concern about their potential to repay it, which I discover helpfully confirming of the thesis right here.

Taxes

AltaGas is a Canadian company, and the dividends are eligible for the dividend tax credit score for Canadian buyers. That improves the after-tax worth of the dividends when the shares are held in non-registered accounts. For US buyers, there’s Canadian withholding tax of 15% (as results of the Canada-US tax treaty). Shares held in US retirement accounts (e.g. IRA) are exempt from the withholding tax by that very same treaty. For US buyers exterior of retirement accounts, the tax will likely be withheld, however there could also be a chance to reclaim it as a tax credit score.

Conclusion

I feel AltaGas most well-liked shares are a robust risk-reward at their current yields. Traders within the sequence B (ALA.PR.B) are receiving a tax-advantaged yield in extra of 11% tied to floating charges that appear extra prone to rise than fall. The secure US utility operations are a supply of serious worth and supply safety to the dividend within the type of secure earnings. I’ve modified my publicity to the B shares from the A shares.

Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please pay attention to the dangers related to these shares.